Greenhill & Co Inc (GHL) 2022 Q2 法說會逐字稿

Hello, and welcome to the Greenhill & Co., Inc. Second Quarter 2022 Earnings Call. (Operator Instructions) Please note, today's event is being recorded.

I would now like to turn the conference over to Patrick Suehnholz. Mr. Suehnholz, please go ahead.

Thank you. Good afternoon, and thank you all for joining us today for Greenhill's Second Quarter 2022 Financial Results Conference Call. I am Patrick Suehnholz, Greenhill's Head of Investor Relations. And joining me on the call today is Scott Bok, our Chairman and Chief Executive Officer.

Today's call may include forward-looking statements. These statements are based on our current expectations regarding future events that, by their nature, are outside of the firm's control and are subject to known and unknown risks, uncertainties and assumptions. The firm's actual results and financial condition may differ, possibly materially, from what is indicated in those forward-looking statements.

For a discussion of some of the risks and factors that could affect the firm's future results, please see our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date on which they are made.

I would now like to turn the call over to Scott Bok.

Thank you, Patrick. We've continued to have a high level of client engagement, but in revenue terms, had a light second quarter and first half given a relative lack of large transaction completions. Our revenue for the quarter was $36 million and for the first half was $81.5 million. Our backlog continues to suggest that this year is likely to play out very much like the 3 years before it, when we had a weak first half followed by a better second half and particularly a strong fourth quarter, resulting in a respectable full year outcome.

While many of our competitors have spoken of a more challenging second half environment, our firm is of a size where our revenue is not closely tied to the ups and downs of the global M&A market. Indeed, it is noteworthy that in the past 3 years, we generated 79% more revenue in the second half than we did in the first half, and our backlog suggests another strong finish to 2022.

Meanwhile, we continue to remain disciplined on expenses with our year-to-date operating costs only slightly higher than last year. If revenue materializes as we expect, this should be another year of generating strong cash flow, which we will continue to direct towards share repurchases, so long as our market valuation remains attractive.

As to where we see revenue coming from, recent economic and market developments are impacting our expected sources of revenue in varying ways. By sector, we expect relatively good performances in consumer, energy, mining and telecom infrastructure. By region, we expect significant improvement in Europe relative to a weak performance last year. And we expect a second year of strong performances in Australia and Canada given higher commodity prices.

By type of advice, the restructuring business is relatively quiet given low default rates. Financing advisory is slower, given tighter credit markets, but M&A remains active even if overall global deal activity is well below last year's level.

While our historic focus on M&A advice for public companies is serving us well this year, we remain committed to the 3 strategic initiatives I've spoken of frequently in recent quarters. First is expanding our coverage of financial sponsors. That client type is one that can make use of all of our services from M&A to financing and restructuring to capital raising and secondary sales of fund limited partner interest. We believe we made good progress on this initiative over the past 18 months.

Second is winning more financing advisory roles. This activity is highly complementary to our restructuring advisory business for companies that are in financial distress. We made some progress in this area last year but believe that the tremendous growth in the direct lending market creates a very large opportunity worth pursuing.

Third is our private capital advisory business, where in the past 18 months, we've built out a global team to raise primary capital for private funds of many types, including private equity, infrastructure, credit and others. That team is already in the market with a number of high-quality fund offerings, and we expect that area to be a significant contributor to firm revenue in years to come. At the same time, we continue to develop the secondary aspect of this business globally.

Turning to our costs. Our compensation expense for the quarter was $43.2 million and for the first half was $90 million, slightly higher than last year, primarily as a result of higher salary levels in our industry. The year-to-date compensation ratio is well above normal given our relatively low revenue. But just as we did in the past few years, we expect to bring that ratio down toward our target range for the full year as more revenue materializes in the second half.

Our noncompensation costs were up about $1 million in the quarter versus last year, but the year -- for the year-to-date are just slightly below last year's level.

Our balance sheet remains in good shape with $64.5 million in cash at midyear, despite the fact that most of our revenue should come in the second half. Our term loan balance remains at $271.9 million. It's worth noting that a few years ago, we comfortably carried debt in an amount of $100 million greater than the current level. So obviously, we paid down quite a lot of that debt in the past couple of years, and we remain committed to a strong credit profile. The remaining balance of our loan matures in April 2024, and we aim to refinance that well in advance maturity, most likely in the first half of next year.

During the quarter, we repurchased 851,000 shares and share equivalents at an aggregate cost of $10.4 million. Year-to-date, we repurchased 1.9 million shares and share equivalents at a total cost of $30.2 million. We had $44.6 million of remaining share repurchase authority as of the quarter end.

We continue to see our shares as significantly undervalued relative to our proven ability to generate strong cash flow in a wide variety of market conditions. Separately, our Board declared a dividend of $0.10 per share, consistent with last quarter.

In closing, I note that we added another managing director just this past week. She's a longtime Credit Suisse banker, who was most recently at Solomon Partners. She will focus primarily on telecom infrastructure, one of our key sectors, as well as some media clients. We currently have 80 managing directors worldwide, and we remain focused on recruiting additional talent. Given the state of the markets and some of the challenges faced by our large bank competitors, we are expecting 2023 to be a big recruiting year for us.

With that, I'm happy to take any questions.

(Operator Instructions) And the first question comes from Devin Ryan with JMP Securities.

So Scott, in terms of the outlook, I mean, it sounds pretty similar, I think, to probably the same point we were at last year and the year before just in terms of kind of what the first half looked like relative to some optimism around the back half. Obviously, the environment is a lot more challenging today more broadly than probably it was the last couple of years. There's more uncertainty.

But can you maybe just characterize a little bit more around that optimism for the back half of the year? I guess what I'm trying to figure out is, do you have a lot of visibility into kind of what's already been announced and just deals that should be closing? Obviously, things can change, but just that deals that are announced, they close on their normal schedule and that gets you there. Or do we still need to see maybe a tightening of bid-ask spread from private deals at some point in the back half of the year to be able to kind of get to the end result of a solid year and a really strong back half.

I think you're right, Devin, that where we are is really quite similar to where we were each of the last 3 years when we had quite a similar outcome, weak first half, very strong fourth quarter, better third quarter along the way. And if you go back to 2020, I mean, the world didn't exactly look great in July of 2020, right? We were kind of just in the -- getting through the first wave of the pandemic and so on.

But regardless of what the market situation is or economic situation, by August 1, I mean, you've -- you kind of know what's going to happen for the year. You can be sure not all of the things on your list are going to happen. But it's not like a lot of new major things are going to come out of the woodwork and go from assignment to announcement to completion in sort of under 5 months. I mean that can happen a little bit, but not very often.

So in other words, I do have a lot of visibility. As you said, you never know exactly which ones will close, which one will get approvals in time, which ones will complete as expected in terms of how a process plays out. But of course, with probability weight, everything -- as we think about our backlog as well. So we try to factor that in. But in short, we -- when I make the comments I make, it's with a very specific list of key transactions and, of course, a very, very long list of smaller ones that are factored into that calculation.

Okay. That's great color. And if you can, can you give us a little bit more flavor around the different geographies of the firm and kind of where maybe you're seeing business pick up versus the opposite? Is it consistent across geographies? Or are there anywhere that are kind of -- the outlook is looking better or worse?

I feel like this year might be more balanced than a lot of recent years happened. Last year was very quiet for us in Europe. And this year, it's not going to be probably a great year in Europe by any stretch, but it's going to be considerably better than it was last year.

Australia and Canada did well last year. I think a lot of that maybe is on the back of increasing commodity prices, which helps those economies more than it does most others. So business is quite good on both of those.

And in the U.S., there's really -- there's not a lot of great pockets of huge strength or of great weakness. I mean it's kind of a -- I think it's a year when we're going to see fairly broad participation across our regions and across our sectors. But obviously, with the normal variations within offices or within teams or so and as to people who really had quite a strong year and others less so.

Yes. Got it. Okay. If I can just squeeze one more quick one in on the buybacks. So you hear you loud and clear on the share price and kind of how you guys are thinking about it. How should we think about capacity for buybacks, particularly related to an expectation that you should have a much better second half than first half? So you bought back 850,000 shares in the second quarter, but is the thought process, if the stock were in a similar ballpark, that your kind of capacity build pretty materially into the back half? Or anything else you can share? I know you don't want to completely give away kind of the intentions here, but just love any more perspective on how you're thinking about the ability to buy back stock.

Well, look, we're always trying to strike a balance, as I alluded to in my written remarks, between maintaining a strong credit profile and buying back shares opportunistically whenever we think the share price is attractive. So if the rest of the year plays out as we expect it will, and hopefully, there's some credibility that comes from the fact that we've made similar pronouncements 3 years in a row, and it did play out that way, we'll have significant capacity relative to the ability to even buy back shares. As you know, there are limitations on daily buying and things like that. So there's kind of a limit to what you can get done. But I think our ability to go into the market and do that, if the year plays out as hoped, should be -- should not be a problem.

And the next question comes from Michael Brown with KBW.

So I guess, Scott, I'm just trying to dig in a little on your guidance on the second half here. And so if you could maybe put a finer point on that. Are you -- is it fair to expect profitability here in the second half? I know you don't have great visibility. But I guess what I'm trying to think about is in each of the prior 3 years that you referenced, you're actually able to get to full year profitability. Obviously, market conditions could certainly impact how that plays out here into the second half. But what are your thoughts on maybe that full year profitability or even narrowing in on just the second half and how you're thinking about profitability there?

I'm not sure I can be much more specific than to say that the way it looks to us, sitting and looking at our pipeline of announced deals and deals that are kind of behind the scenes and nearing announcement and so on, that it looks very much like the last 3 years. And you can look at those 3 years and those 3 years when we had a pretty weak performance in the first half, really quite substantial performance and profitability in the second half and netted out to a good place all 3 of those years. There are no guarantees in life. And as I said in an answer to a prior question, you never know until a deal is closed that it's going to close. But based on past experience, we're expecting an evolution of the year to be very similar to the past 3.

Okay. And then I was just looking at your cash levels, and that looks like it's the lowest it's been since 2017 when the leverage recap began. I just wanted to check, like how low can that comfortably run? And do you think this is probably the trough for the year? And I guess I just -- I suppose I still struggle with the question, why not pay down the debt faster just given the rising rate environment now versus doing the share buybacks?

Well, as I was saying earlier, we want to strike a balance between maintaining a strong credit profile, which certainly we think we have. We've paid down more than $100 million of debt from our recapitalization transaction, our refinancing of that 2, 3 years ago. So that's a lot of debt paid down. But at the same time, what we want to do, what's good for our shareholders. And when the stock is at a level where we think it's really undervalued, we're going to buy back stock.

So we're striking a balance between those 2. And I think our balance sheet is in reasonable shape with far less depth than what we had when rates were a lot lower. And at this moment, I think you tip the balance more toward buying back shares. And share price goes higher or our view changes on the debt, we'll flip the dial back toward more debt repayment. But I think we're -- for us, in our view, we're striking the right balance between those 2 right now.

And the next question comes from James Yaro with Goldman Sachs.

Just quickly on the comp ratio here. So as a result of your fixed junior banker comp and guarantees for the hires you made recently, maybe you could just help us think about what the absolute level of fixed costs are on a quarterly basis, just to help us model the comp ratio.

That's probably too detailed a question for me to try to answer off the top of my head. I think -- I mean, I think if you look at how our -- and the minimum is not, in some ways, that relevant anyway. You need to be competitive in terms of compensation. And certainly, we have been in recent years and intend to be going forward as well.

So I mean the comp ratio certainly is out of whack relative to where we would like it to be for the year-to-date, but the same thing was true in the 3 prior years. And in each of those cases, we got back to right around our target range, and that's absolutely our objective for the second half of this year as well.

Okay. That makes a lot of sense. The other one that I just want to ask about is on the noncomp side. How normalized is the level you're at this quarter? And do you expect the impact of more travel for senior bankers to put upward pressure on the noncomp expense from here in the back half?

I don't expect a lot of pressure on that, certainly not in the back half. I don't think they're going to -- I mean, [PEP] travel has picked up certainly in our -- even in our second quarter already. I don't expect it to maybe move a lot more in the very near term. And there are some other noise within the noncomp. I mean it wasn't that long ago we were building out a New York -- a new New York headquarters and therefore, carry 2 lease costs for some period of time. Right now, we're doing that in London, where we're building out new space. So our noncomp, frankly, this year is even a little bit elevated relative to what it would be in kind of a normal run rate basis.

So I'd expect next year's noncomp number to be very similar to this year's. And as we grow and as travel returns fully to normal, which probably will never be back to what it was in 2019, it may tick up a little bit from there, but I don't expect a lot of near-term pressure.

Okay. And I think that's our last question. So thank you all for joining, and we look forward to speaking to you again next quarter.

Thank you. This does conclude today's teleconference. Thank you for attending today's presentation. You may now disconnect your lines.